Quality Dividend ETFs May Have Legs

In the ongoing low-yield environment, yield-hungry investors have bid up dividend stocks for higher returns. Despite concerns that the asset category may be overpriced, high-quality dividend exchange traded funds may still have more room to run.

Tony DeSpirito, co-manager of BlackRock Equity Dividend Fund, argued that stocks with a good record of raising dividends may continue to improve, reports John Waggoner for InvestmentNews.

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“The decade of the 1990s and the run-up to the tech-bubble didn’t reward quality and yield, but since the tech-bubble top, this style has earned a consistent return premium,” Scott Opsal, research director for the Leuthold Group, said.

While bond-esque, dividend-paying stocks like utilities have seen valuations rise in light of the depressed fixed-income yields, DeSpirito contended that companies with a record of raising dividends are more attractive than usual since they issue their dividends cautiously. These dividend payers typically include higher quality companies that are more cautious when raising dividends since they would do so without stretching their balance.

Income-minded investors have also typically gravitated toward these high quality companies as firms that regularly raise dividends also tend to be confident about their ability to continue paying the dividends as the dividend increases are also calculated in line with future growth.

Looking at the potential rising interest rate environment ahead, DeSprito also said that these companies that regularly raise dividends would also do well after an interest rate hike.

Investors have a number of high-quality dividend-paying stock ETFs to choose from. The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and has a 2.16% 12-month yield. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 2.79% 12-month yield. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.39% 12-month yield. The ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) only includes companies that have increased their dividends for at least 25 consecutive years and offers a 1.79% 12-month yield.